ESG & Institutional Investment
Part 5
ICMA
ICMA: International Capital Market Association link.
The International Capital Market Association (ICMA) is a non-profit organization that represents the interests of the global financial market.
It provides a forum for financial institutions, investors, and other stakeholders to discuss and develop policies, practices, and guidelines for the global capital markets.
The mission of ICMA is to promote resilient well-functioning international and globally coherent cross-border debt securities markets, which are essential to fund sustainable economic growth and development.
The idea is to ensure that investors can trust the financial system while companies access capital at a reasonable cost.
ICMA
ICMA serves as Secretariat to the
- Green Bond Principles (GBP),
- the Social Bond Principles (SBP),
- the Sustainability Bond Guidelines (SBG) and
- the Sustainability-Linked Bond Principles (SLBP)
while also trying to lead the Climate Transition Finance Initiative
The Principles are a collection of voluntary frameworks with the stated mission and vision of promoting the role that global debt capital markets can play in financing progress towards environmental and social sustainability.
ICMA
Climate Transition Finance
In order to meet the global objectives enshrined within the Paris Agreement on Climate Change to keep the global temperature rise this century well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5°C, significant financing is needed.
The concept of climate transition focuses on the credibility of an issuer’s climate change-related commitments and practices.
Climate transition finance is the extent to which an issuer’s financing program supports the implementation of its climate change strategy. This strategy should clearly communicate how the issuer intends to adapt its business model to make a positive contribution to the transition to a low carbon economy.
Corporate climate change strategies should respond to stakeholder expectations by purposefully and explicitly seeking to play a positive role in achieving the Paris Agreement.
Climate Transition Finance
In Summary, Climate Transition Finance is about:
Creating a corporate strategy,
Acknowledge material risk factors
Use science-based evidence
Be transparent.
Climate Transition Finance
There are four key elements to these recommendations:
1. Issuer’s climate transition strategy and governance:
The financing purpose should be for enabling an issuer’s climate change strategy. A ‘transition’ label applied to a debt financing instrument should serve to communicate the implementation of an issuer’s corporate strategy to transform the business model in a way which effectively addresses climate-related risks and contributes to alignment with the goals of the Paris Agreement.
2. Business model environmental materiality:
The planned climate transition trajectory should be relevant to the environmentally-material parts of the issuer’s business model, taking into account potential future scenarios which may impact on current determinations concerning materiality
Climate Transition Finance
3. Climate transition strategy to be ‘science-based’ including targets and pathways:
The planned transition trajectory should:
- be quantitatively measurable (based on a measurement methodology which is consistent over time);
- be aligned with, benchmarked or otherwise referenced to recognized, science-based trajectories where such trajectories exist;
- be publicly disclosed (ideally in mainstream financing filings), include interim milestones, and;
- be supported by independent assurance or verification.
Climate Transition Finance
4. Implementation transparency.
Acknowledging the various pressures that issuers from hard-to-abate sectors are currently coming under, there is an obvious incentive to respond in the short term with announcements regarding strategy, targets and related commitments.
However, addressing the issue of financing of business operations and infrastructure to ensure the operational picture can deliver the announced response over extended time horizons is more challenging and time-consuming.
For this reason, it is recommended to provide transparency with regard to the planned capital and operational expenditure decisions which will deliver the proposed transition strategy.
Green Bonds Principles link
Definition: Green Bonds are any type of bond instrument where the proceeds or an equivalent amount will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects and which are aligned with the four core components of the GBP.
Green bonds are equivalent to other fixed income securities, both taxable and tax-exempt, except that these types of bonds or other similar debt instruments raise funds specifically to finance new and existing projects with environmental benefits.
Green bonds enable capital-raising and investment for new and existing projects with environmental benefits.
Green Bonds Principles link
The Green Bond Principles (GBP) are voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the Green Bond market by clarifying the approach for issuance of a Green Bond.
The Green Bond Principles (GBP) seek to support issuers in financing environmentally sound and sustainable projects that foster a net-zero emissions economy and protect the environment
- best practices when issuing bonds serving social and/or environmental purposes
- promote transparency and disclosure
Examples of Green Projects
- Renewable energy
- Energy efficiency (such as in new and refurbished buildings, energy storage, etc.);
- Pollution prevention and control (including reduction of air emissions, greenhouse gas control, soil remediation, waste prevention, etc.);
- Environmentally sustainable management of living natural resources and land use (including environmentally sustainable agriculture, etc.)
- Terrestrial and aquatic biodiversity conservation
- Clean transportation
- Sustainable water and wastewater management
- Climate change adaptation: (including efforts to make infrastructure more resilient to impacts of climate change)
- Green Buildings
Types of Green Bonds
- Standard Green Use of Proceeds Bond: an unsecured debt obligation with full recourse-to-the-issuer only and aligned with the GBP.
- Green Revenue Bond: a non-recourse-to-the-issuer (i.e., with collateral) debt obligation aligned with the GBP in which the credit exposure in the bond is to the pledged cash flows of the revenue streams, fees, taxes etc., and whose use of proceeds go to related or unrelated Green Project(s).
- Green Project Bond: a project bond for a single or multiple Green Project(s) for which the investor has direct exposure to the risk of the project(s) with or without potential recourse to the issuer, and that is aligned with the GBP.
- Secured Green Bond: a secured bond
Green Bonds Principles
The four core components for alignment with the GBP are:
- Use of Proceeds: describes the utilization of the proceeds of the bond for eligible Green Projects.
- Process for Project Evaluation and Selection: communicate the goals of the project and how the project fits within GBP.
- Management of Proceeds: create processes to make sure the proceeds are used in the project described.
- Reporting: demand full transparency with up to date information.
Green Bonds Principles
The GBP also has two Key Recommendations
1) Green Bond Frameworks: It is recommended that issuers summarise in their Green Bond Framework relevant information within the context of the issuer’s overarching sustainability strategy
2) External Reviews: is recommended that issuers appoint (an) external review provider(s) to assess through a pre-issuance external review the alignment of their Green Bond or Green Bond programme and/or Framework with the four core components of the GBP
Green bonds principles
Social Bond Principles (SBP)
Examples
- Affordable basic infrastructure (e.g. clean drinking water, sewers, sanitation, transport, energy)
- Access to essential services (e.g. health, education and vocational training, healthcare, financing and financial services)
- Affordable housing
- Employment generation, and programs designed to prevent and/or alleviate unemployment stemming from socioeconomic crises
- Food security and sustainable food systems
- Socioeconomic advancement and empowerment
Social Bond Principles (SBP)
The four core components for alignment with the SBP are:
- Use of Proceeds: describes the utilization of the proceeds of the bond .
- Process for Project Evaluation and Selection: communicate the goals of the project and how the project fits within SBP.
- Management of Proceeds: create processes to make sure the proceeds are used in the project described.
- Reporting: demand full transparency with up to date information.
Social Bond Principles (SBP)
The GBP also has two Key Recommendations
1) Social Bond Frameworks: Issuers should explain the alignment of their Social Bond or Social Bond programme with the four core components of the SBP in a Social Bond Framework or in their legal documentation.
2) External Reviews: is recommended that issuers appoint (an) external review provider(s) to assess through a pre-issuance external review the alignment of their Social Bond or Social Bond programme and/or Framework with the four core components of the SBP.
Sustainability Bond Guidelines (SBG)
Sustainability bonds are bonds where the proceeds will be exclusively applied to finance or re-finance a combination of both green and social projects.
They must follow the GBP and SBP.
The common four core components of the Principles and their recommendations on the use of external reviews and impact reporting therefore also apply to sustainability bonds.
Sustainability-Linked Bond Principles
Sustainability-Linked Bonds (“SLBs”) are any type of bond instrument for which the financial and/or structural characteristics can vary depending on whether the issuer achieves predefined Sustainability/ ESG objectives.
The objectives are (i) measured through predefined Key Performance Indicators (KPIs) and (ii) assessed against predefined Sustainability Performance Targets (SPTs).
Sustainability-Linked Bond Principles
The SLBP have five core components:
- Selection of Key Performance Indicators (KPIs): should be measurable, relevant, verifiable, etc.
- Calibration of Sustainability Performance Targets (SPTs): SPTs are the targets that the issuer wants to achieve.
- Bond characteristics: The cornerstone of a SLB is that the bond’s financial and/or structural characteristics can vary depending on whether the selected KPI(s) reach (or not) the predefined SPT(s), i.e. the SLB will need to include a financial and/or structural impact involving trigger event(s).
- Reporting: The issuer reports relevant information.
- Verification: Issuers should seek independent and external verification of their performance level against each SPT for each KPI by a qualified external reviewer with relevant expertise.
Sustainability-Linked Bond Principles
ICMA link
Corporate Green Bonds Link
Equator principles link
The Equator Principles (EP) are intended to serve as a common baseline and risk management framework for financial institutions to identify, assess and manage environmental and social risks when financing Projects.
The idea is to mitigate the potential environmental and social risks related to a project.
It gives financial institutions a standardized way for assessing the S & E risks of the project.
Many financial institutions have signed the principles. Virtually, soon enough, all projects would need to comply with these principles in order to find money for execution.
List of Members
Equator principles link
Project Finance: is a method of financing in which the lender looks primarily to the revenues generated by a project, both as the source of repayment and as security for the exposure.
This type of financing is usually for large, complex and expensive installations that might include, for example, power plants, chemical processing plants, mines, transportation infrastructure, environment, and telecommunications infrastructure.
The Equator Principles apply globally and to projects in all industry sectors.
The Equator Principles apply to several types of financial products
Equator principles link
Principle 1: Review and Categorization
When a Project is proposed for financing, the EPFI will categorize the Project:
Category A – Projects with potential significant adverse environmental and social risks and/or impacts that are diverse, irreversible or unprecedented;
Category B – Projects with potential limited adverse environmental and social risks and/or impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures; and
Category C – Projects with minimal or no adverse environmental and social risks and/or impacts.
Equator principles link
Principle 2: Environmental and Social Assessment
The EPFI will require the client to conduct an appropriate Assessment process to address, to the EPFI’s satisfaction, the relevant environmental and social risks and scale of impacts of the proposed Project.
One or more specialized studies may also need to be undertaken
The client is expected to include assessments of potential adverse Human Rights impacts and climate change risks.
Equator principles link
Principle 3: Applicable Environmental and Social Standards
The Assessment process should, in the first instance, address compliance with relevant host country laws, regulations and permits that pertain to environmental and social issues.
Equator principles link
Principle 4: Environmental and Social Management System and Equator Principles Action Plan
For all Category A and Category B projects, the EPFI will require the client to develop and/or maintain an Environmental and Social Management System (ESMS).
Environmental and Social Management System (ESMS) is the overarching environmental, social, health and safety management system which may be applicable at a corporate or Project level. The system is designed to identify, assess and manage risks and impacts in respect to the Project on an ongoing basis. The system consists of manuals and related source documents, including policies, management programs and plans, procedures, requirements, performance indicators, responsibilities, training and periodic audits and inspections with respect to environmental or social issues, including Stakeholder Engagement and grievance mechanisms.
Equator principles link
Principle 5: Stakeholder Engagement
For all Category A and Category B Projects, the EPFI will require the client to demonstrate effective Stakeholder Engagement, as an ongoing process in a structured and culturally appropriate manner, with Affected Communities, Workers and, where relevant, Other Stakeholders.
The client will take account of, and document, the results of the Stakeholder Engagement process, including any actions agreed resulting from such process.
Equator principles link
Principle 6: Grievance Mechanism
For all Category A and, as appropriate, Category B Projects, the EPFI will require the client, as part of the ESMS, to establish effective grievance mechanisms which are designed for use by Affected Communities and Workers, as appropriate, to receive and facilitate resolution of concerns and grievances about the Project’s environmental and social performance.
Grievance mechanism is a formal procedure that allows agents to fill complaints and get answers/solutions, etc.
Equator principles link
Principle 7: Independent Review
For all Category A and, as appropriate, Category B Projects, an Independent Environmental and Social Consultant, will carry out an Independent Review of the Assessment process.
Equator principles link
Principle 8: Covenants
For all Projects, where a client is not in compliance with its environmental and social covenants, the EPFI will work with the client on remedial actions to bring the Project back into compliance.
If the client fails to re-establish compliance within an agreed grace period, the EPFI reserves the right to exercise remedies, including calling an event of default, as considered appropriate.
Equator principles link
Principle 9: Independent Monitoring and Reporting
For all Category A and, as appropriate, Category B Projects, in order to assess Project compliance with the Equator Principles after Financial Close and over the life of the loan, the EPFI will require independent monitoring and reporting.
Equator principles link
Principle 10: Reporting and Transparency
The client will ensure that, at a minimum, a summary of the ESIA is accessible and available online.
The client will report publicly, on an annual basis, GHG emission levels during the operational phase for Projects emitting over 100,000 tonnes of CO2 equivalent annually.
Environmental and Social Impact Assessment (ESIA) is a comprehensive document of a Project’s potential environmental and social risks and impacts. An ESIA is usually prepared for greenfield developments or large expansions with specifically identified physical elements, aspects, and facilities that are likely to generate significant environmental or social impacts. Exhibit II provides an overview of the potential environmental and social issues addressed in the ESIA.
Principles for Positive Impact Finance link
UNEP Finance Initiative brings together a large network of banks, insurers and investors that collectively catalyses action across the financial system to deliver more sustainable global economies.
It is a United Nations project
Principles for Positive Impact Finance link
Principles for Positive Impact Finance link
Principles for Positive Impact Finance link
Principles for Positive Impact Finance link
Finger et al 2018 JIFMIM Source
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Social Bond Principles (SBP) link
Social Bonds are any type of bond instrument where the proceeds, or an equivalent amount, will be exclusively applied to finance or re-finance in part or in full new and/or existing eligible Social Projects and which are aligned with the four core components of the SBP
The SBP are voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the Social Bond market by clarifying the approach for issuance of a Social Bond.